Replacing Old Policy with New
Think twice before discontinuing or changing your current life insurance policy in order to buy a new one. It is rarely in your best interest; following are a few reasons why...
It Could Cost You - During the early years of policy ownership, much of what you paid covered the insurance company's expense of selling and issuing the policy. This expense will be incurred all over again when you buy a new policy.
If a cash value policy is surrendered and the proceeds placed into a new policy, the cash value may be relatively small for several years due to the imposition of surrender charges. In fact, the new policy's cash value may never be as large as that of the existing policy.
If you are older and your health has changed, premiums and/or insurance charges for the new policy will often be higher. Beware of anyone offering free insurance or more insurance at a lower cost. It is likely the premium due on the new policy is being paid by drawing cash from an existing policy.
You Could Lose Guarantees - Life insurance is purchased to assure the accumulation of a desired amount of liquid capital at death. If you are considering the purchase of a variable life (VL) or variable universal life (VUL) policy, be aware that you bear all of the investment risk and more of the risk of adverse trends in mortality and expenses than with a traditional whole life policy. The cash value, and perhaps the death benefit, under VL and VUL policies would not be guaranteed.
You Could Lose Benefits - Certain provisions such as the suicide and contestable clauses are required by state law to safeguard the policy owner and beneficiary. Usually after one or two years from the date of the policy, the insurance company cannot challenge the validity of the policy or deny benefits if death is a result of suicide. These clauses, which may have already been satisfied in your existing policy, will often start over on a new policy. The result - the insurance company may have the right to cancel the contract or refuse to pay a claim for certain events during the initial period of the policy.
You Could Owe Income Taxes - According to Section 72(e) of the Internal Revenue Code, upon the complete surrender of a policy, if the gross cash value of the present policy exceeds the new premiums paid, the difference is taxable to the policyowner. You should understand that a 1035 exchange does not eliminate taxable income if there is a taxable gain and there is an outstanding policy loan at the time of surrender.
Get All The Facts - Before making the decision to replace or exchange an existing policy, make sure you get all the facts. Read over your existing policy, and ask your representative or a member of your insurer's policyowner service department for a detailed cost breakdown of premiums, cash surrender values and death benefits. Request the same information for the new policy you are considering. Then, compare the two thoroughly.
Make sure you hear from both your existing company and your proposed company before you make your decision.
If your requirements have changed since you bought your policy, you may be able to change your present policy, or even add to it, to get the coverage and benefits you now need.
If you decide to replace the policy you now own with other insurance, be sure:
- To insist that the agent making the proposal put it in writing.
- That you qualify for the insurance applied for.
- That you do not take action to terminate your existing policy until your new policy has been issued and you have examined it and found it acceptable.